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Blue And Co Cti Owners Comp In Phys Practice Valuations 2010 10 14

Jeff Moffatt
Jeff Moffatt

This document discusses benchmarking physician compensation for valuation purposes. It provides sources of benchmark compensation data, such as surveys from the Medical Group Management Association and Sullivan Cotter and Associates. It also outlines factors to consider when benchmarking compensation, such as physician specialty, years in practice, and productivity measured in work RVUs. The document uses a sample solo family practitioner to demonstrate benchmarking compensation against industry survey data.

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OWNERS COMPENSATION IN PHYSICIAN PRACTICE VALUATIONS Kam McQuay, CPA/ABV, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 Jeff Moffatt, CPA/ABV/CITP, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 1
INTRODUCTION Blue & Co. is currently one of the 100 largest CPA firms in the United States. We make it our business to understand our clients' needs by providing them with the highest quality professional services through specialization, teamwork, and a commitment to excellence. We currently have offices located in Columbus, Ohio; Indianapolis, Indiana; Louisville, Kentucky; Columbus, Indiana and Seymour, Indiana. We employ over 270 people, including 30 directors and 140 professional staff members. 2 Who is Blue? Owners Compensation in Physician Practice Valuations October 14, 2010
OVERVIEW According to Jim Hitchner and Ron Seigneur: It is not unusual for the controlling shareholder to take compensation in excess of going market rates that might be paid for the same services. Since the willing buyer of a control ownership interest could reduce compensation to market levels, often it is appropriate to add back excess compensation to cash flow to reflect the additional economic benefits that would be available to the willing buyer. Financial Valuation: Applications and Models, Second Edition, 2006, p 100 According to Shannon Pratt, Robert Reilly and Robert Schweihs: The general idea of the compensation adjustment is to substitute the cost of hiring and paying a non-owner employee for the compensation actually paid to the owner to perform the same functions. Valuing Small Business and Professional Practices, 2nd Edition, Year, p 92 3 What are we trying to accomplish by looking at physician compensation? Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Lets consider some industry data but where to start? 4 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Risk Management Associates (RMA) The RMA eStatement Studies database publishes private company financial data and ratios used to analyze company performance, risk and growth. RMA surveys have been recognized both within banking and non banking institutions as an authoritative resource for benchmarking small and medium sized businesses against industry data. The information provided in RMAs eStatement Studies is obtained directly from the financial statements submitted to RMA member financial institutions nationwide. 5 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA First Research First Research provides industry profiles covering over 700 Industry sectors. First Research industry profiles contain critical analysis, statistics and forecasts that allow the user to compare a given company to the overall industry. Industry data is obtained from primary and secondary sources such as trade publications, company annual reports, SEC filings such as 10Ks, and the US Bureau of Labor Statistics. 6 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA US Internal Revenue Service (IRS) ValuSources IRS Corporate Ratios provides industry standard financial statement benchmarking data for over 250 industries, organized by Standard Industrial Classification (SIC) code. This report allows the user to benchmark a given entity against its peers within a specific industry. These financial ratio benchmarks are calculated using data from corporate tax returns collected by the United States Internal Revenue Service. 7 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Bureau of Labor Statistics The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. www.bls.gov/bls/infohome.htm 8 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Salary.com Salary.com is a leading provider of on- demand human resources software that helps businesses and individuals manage pay and performance. www.salary.com/aboutus/Facts.asp 9 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Medical Group Management Association (MGMA) MGMA surveys have been recognized both within the healthcare industry and by the federal government as one of the acceptable resources to be used in determining the fair market value of physician compensation and are frequently used to benchmark healthcare organizations operational performance. 10 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Sullivan, Cotter and Associates (Sullivan) Sullivan also publishes survey data summarizing physician compensation and production information and is an additional authoritative source of healthcare industry benchmark data. 11 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA American Medical Group Association (AMGA) The American Medical Group Association (AMGA) represents medical groups and organized systems of care, providing research, benchmarking and other advocacy services. The AMGA publishes various reports and surveys that allow medical groups to benchmark their performance against other groups on both a national and regional level. 12 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Hospital and Healthcare Compensation Service (HHCS) Hospital & Healthcare Compensation Service (HHCS) specializes in healthcare salary and benefits research. As a publisher of annual salary & benefits reports, HHCS conducts an extensive program of ongoing compensation research in areas of healthcare such as hospitals, physician practices, nursing homes, etc. 13 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
SOURCES OF BENCHMARK DATA Other medical specialty groups American Academy of Family Practitioners American College of Cardiology American Academy of Orthopedic Surgeons Other industry associations American Medical Association MGMA state chapters Healthcare Finance Management Association (HFMA) 14 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Survey says 15 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Physician qualifications Medical specialty Skill set Performance Years in practice Practice location Geographic location Metropolitan versus rural Market conditions Competitive environment Under served area Saturated Full Time Equivalent (FTE) Full time (0.8 FTE+) versus part time 16 Factors to consider Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Potential buyers* Hospitals Health networks Solo MD Group practice Other data points Patient visits Production/charges Collections for professional charges (net revenue) Work Relative Value Units (wRVUs)** * Well cover this shortly. ** IBID. 17 Factors to consider Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Benchmark compensation data 18 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010 Initial conclusion Owners compensation set based upon the average of the median data, $180,000but we need to take a longer look at this.
BENCHMARKING PHYSICIAN COMPENSATION Setting physician compensation is a benchmarking exercise Historical compensation Productivity Charges Collections for professional charges wRVUs Other forms of compensation Medical directorship On-call pay Ancillary income Ambulatory Surgery Center (ASC), imaging, etc. Federal regulations and guidelines may take precedence over valuation principles Stark laws Anti-kickback statute Potential employment arrangements must be considered in compensation projections Fair market value requirement Test for commercial reasonableness 19 Primary considerations Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Primary care, often the first point of contact for a patient in the continuum of care Family Practice Internal Medicine Pediatrics Specialty care, some examples from the National Institute of Health (NIH) http://www.nlm.nih.gov/medlineplus/ency/article/001933.htm 20 Physicians generally fall into two main types Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Types of physician services Evaluation and management (E/M) General office visit Consultation Counseling or coordination of care between physicians Procedures Surgery, treatments, therapy, etc. Collections for physician services Commercial payors Blue Cross/Blue Shield, Aetna, Cigna, etc. Government payors Medicare Medicaid Tricare (CHAMPUS) 21 Medical revenue Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Stark law Physician referrals under Medicare and Medicaid Anti-kickback statute Payment for referrals Anyone engaging in business with a federal healthcare program Valuation adjustments effected by Stark/Anti-kickback Cannot substitute more favorable reimbursement rates Using a potential buyers payor contracts may result in higher practice value Are the physicians going to be employed by the buyer? Projected compensation should match physician compensation under buyer employment Failure to do so may result in a higher practice value and be considered a device to pay for referrals Two standards of value Payments to physicians must meet traditional fair market value definitions Commercially reasonable Does the prospective transaction make sense? Is this a good business decision? Sanity check 22 Federal regulations and guidelines Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION 1. Historical physician compensation Good starting point for what the market will support Must be adjusted to match compensation as defined by benchmark source Per instructions to the MGMA survey questionnaire: Total compensation State the amount reported as direct compensation on a W2, 1099, or K1 (for partnerships) plus all voluntary salary reductions such as 401(k), 403(b), Section 125 Tax Savings Plan, and Medical Savings Plan. The amount reported should include salary, bonus and/or incentive payments, research stipends, honoraria, and distribution of profits. Do not include The dollar value of expense reimbursements, fringe benefits paid by the medical practice such as retirement plan contributions, life and health insurance, automobile allowances, or any employer contributions to a 401(k), 403(b), or Keogh Plan. 23 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION 2. Gross charges Useful for comparing physicians within a practice or group Not typically relevant for comparison to industry or market data Removes effects of varying payor mix between physicians, accounts receivable management, bad debt, etc. 3. Collections for professional services Typically has a direct effect on physician compensation Can be effected by payor mix, accounts receivable management, bad debt, etc. Poor collections do not necessarily indicate a lack of productivity 24 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION 4. Volume and complexity of services provided Higher volumes = greater production Measured using the Centers for Medicare and Medicaid Services (CMS) Resource Based Relative Value Scale (RBRVS) Unit of measure = Relative Value Units (RVUs) Removes effects that payor contracts, payor mix, accounts receivable management, bad debt, etc. have on collections Allows apples-to-apples comparison of productivity Complex services receive a greater weight 25 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Current Procedural Terminology (CPT) codes Issued by the American Medical Association Subset of the Healthcare Common Procedural Coding System (HCPCS) Referred to as HCPCS Level I Five digit codes Two character modifiers 26 = professional component TC = technical component Others Grouped by type Medicine = 9xxxx Surgery = 1xxxx-6xxxx Radiology = 7xxxx Subject to change Updated annually Additions and deletions Some codes are temporary 26 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION CPT code reports Often generated by a medical billing system May be produced through a component of an Electronic Medical Records (EMR) system 27 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Relative Value Units (RVUs) Primarily used as a component of the Medicare reimbursement formula Assigned by CMS Listed by CPT code (HCPCS code) Also used as a proxy for determining physician productivity Wide spread use and acceptance Often used to set productivity-based incentive payments 28 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Three components Malpractice Relative Value Unit (mpRVU) Varies depending on the relative malpractice exposure of the CPT code Practice Expense Relative Value Unit (peRVU) Represents the expenses the practice incurs in providing the service (general overhead) Work Relative Value Unit (wRVU) Designed to reflect the work effort and intensity required of the physician in providing the service 29 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Physician Fee Schedule (PFS) Relative Value Files Download from www.cms.gov Issued on an annual basis Occasionally updated on an interim basis This year updated in July wRVU values will vary from year-to- year Generally issued before the upcoming calendar year Proposed rule Final rule 30 Calculating wRVUs Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Obtain CPT code reports on a per physician basis Annual summary Consider looking at multiple years Apply PFS data to CPT code summary Total results 31 Calculating wRVUs Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Cardiology (non-invasive) 6,000 9,000 Cardiology (invasive) 7,000 10,000 Family practice 4,000 5,000 Gastroenterology 6,000 9,000 General surgery 5,000 8,000 Internal medicine 4,000 5,000 Orthopedic surgery 7,000 10,000 32 Sample annual wRVU amounts by specialty Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Annual Work Relative Units production of approximately 6,500 Valuation for potential purchase by another solo practitioner 33 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
BENCHMARKING PHYSICIAN COMPENSATION Conclusion Production seems to have outpaced compensation Historical compensation sets a precedent for benchmarked compensation Owners compensation set at $200,000 34 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY A 200+ bed hospital engaged Blue to provide valuation services in regard to negotiations with a local physician group. Practice valuation Fair market value physician compensation Potential employment of physicians Asset appraisal Market overview Small metropolitan area <20,000 people One local hospital Fairly isolated Nearest metropolitan area about 150 miles away The practice has initiated negotiations with the hospital The practices administrator wishes to retire Ownership is considering a sale of the practice to the local hospital The practices physicians are considering employment options with the local hospital 35 Background and engagement details Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY Multi-specialty practice located near the hospital 14 physician owners 6 family practice doctors 5 internal medicine doctors 3 pediatric doctors No employed doctors No mid-level providers Little ancillary income Cosmetic Skin Spa offering elective services Sold oncology infusion service line in 2008 due to the increasing cost of drugs combined with a reduction in reimbursement 36 Practice overview Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 37 Historical financial statements Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 38 Historical financial statements Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 39 Historical compensation all sources Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 40 Historical compensation professional medical services Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 41 Benchmarking historical compensation family practice Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 42 Benchmarking historical compensation internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 43 Benchmarking historical compensation pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 44 Benchmarking collections family practice Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 45 Benchmarking collections internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 46 Benchmarking collections pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 47 Benchmarking wRVUs family practice Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 48 Benchmarking wRVUs internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 49 Benchmarking wRVUs pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 50 Benchmarking summary Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 51 Benchmarking conclusion family practice Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 52 Benchmarking conclusion internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY 53 Benchmarking conclusion - pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY Is the data collected on a national or regional basis? National data was used in this example Does the data include owner/employees where the amount of compensation reported may also include business profit as compensation (i.e., partners in professions and businesses)? Pass through entity Concerning data from business and professional associations, what are the sampling sizes that relate to the subject valuation? National data was used to ensure an effective sample size When using SIC codes in identifying comparables, how do the particular characteristics of the subject company compare with the broader range of companies covered by the SIC code? Matched by physician specialty How does the data use/define the job titles, and are the actual duties comparable to the duties/hours of the subject owner/employee? We have excluded production and collections for non-medical services Does the data survey reflect averages? Medians? Quartiles? Percentile data 54 Business Valuations Resources (BVR) 12 point checklist Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY Does the survey fairly reflect compensation for people with particular niches and sub- specialties; i.e., matrimonial attorneys, forensic accountants, lobbyists, etc.? Usually covered by addressing medical specialty, but exceptions always exist Does the valuator need to include multiple job titles from the survey data to cover the owner/employees duties? Additional survey data Medical directorships On-call pay Academic faculty What is the reliability of the statistics and sources that the survey uses? Known and widely-used Where applicable, are stock options, restricted stock, shadow stock compensation as well as other perks reflected in the data survey and comparable to the owner/employee in question? Excluded Were all companies in the database consistent in having/not having retirement plans separate from salary? Yes Is the owner a key person in the business or a top performer/sales generator? Certain physicians are more productive than others 55 Business Valuations Resources (BVR) 12 point checklist Owners Compensation in Physician Practice Valuations October 14, 2010
CASE STUDY Fair market value? Where does the market data point us? Consistent with conclusion of value? Commercially reasonable? Consider the proposed employment arrangement Fixed salary Places bulk of risk with employer Production-based salary Less risk for employer Base salary + incentives Balances risk between employer and physician Market factors Are there alternative employers? Is this an underserved area? Medical need 56 Other closing considerations Owners Compensation in Physician Practice Valuations October 14, 2010
PENDING CHANGES IN PHYSICIAN COMPENSATION Medicare will discontinue use of consultation codes CPT codes 99241-99245 (office consultation) CPT codes 99251-99255 (inpatient consultation) Effective January 1, 2010 Not reflected in 2009 results E/M codes must be used instead CPT codes 99211-99215 (office/outpatient visit, established) As much as a 30% decrease in reimbursement Specialist report a measurable decrease in revenue Medicare budget cuts Originally scheduled for January 1, 2010 21.3% reduction in Medicare payments Cut based upon Sustainable Growth Rate (SGR) formula Replaced by a 1.3% increase for 2010 Pending cuts December 2010 23% January 2011 30% 57 Changes in Medicare Owners Compensation in Physician Practice Valuations October 14, 2010
PENDING CHANGES IN PHYSICIAN COMPENSATION Expanded coverage Estimated 32 million new Medicare beneficiaries Primary care physician shortage Increased demand for Nurse Practitioners Healthcare in Massachusetts may give some indication of what will happen nationwide Payment reform Measures intended to reduce healthcare spending Bundled payments Episodes of care Disincentives for providing unnecessary procedures or treatments Focus on prevention Payment for outcomes versus procedures Preempt the need for procedures or treatments 58 Healthcare reform Owners Compensation in Physician Practice Valuations October 14, 2010
PENDING CHANGES IN PHYSICIAN COMPENSATION Revised healthcare delivery models Accountable Care Organizations (ACO) A new version of PPOs? Vertical integration of the healthcare delivery system Patient-Centered Medical Homes (PCMH) Physician groups mainly consisting of primary care Long-term care Preventative medicine Hands on patient management Independent Practice Associations (IPA) Healthcare equivalent of a cooperative corporation Shares resources Administrative staff Capital equipment Increased bargaining power Payor contracts Supplies 59 Healthcare reform Owners Compensation in Physician Practice Valuations October 14, 2010
CONCLUSION Kam McQuay, CPA/ABV, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 317.633.4705 kmcquay@blueandco.com Jeff Moffatt, CPA/ABV/CITP, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 317.633.4705 jmoffatt@blueandco.com 60 Questions? Owners Compensation in Physician Practice Valuations October 14, 2010

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Blue And Co Cti Owners Comp In Phys Practice Valuations 2010 10 14

  • 1. OWNERS COMPENSATION IN PHYSICIAN PRACTICE VALUATIONS Kam McQuay, CPA/ABV, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 Jeff Moffatt, CPA/ABV/CITP, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 1
  • 2. INTRODUCTION Blue & Co. is currently one of the 100 largest CPA firms in the United States. We make it our business to understand our clients' needs by providing them with the highest quality professional services through specialization, teamwork, and a commitment to excellence. We currently have offices located in Columbus, Ohio; Indianapolis, Indiana; Louisville, Kentucky; Columbus, Indiana and Seymour, Indiana. We employ over 270 people, including 30 directors and 140 professional staff members. 2 Who is Blue? Owners Compensation in Physician Practice Valuations October 14, 2010
  • 3. OVERVIEW According to Jim Hitchner and Ron Seigneur: It is not unusual for the controlling shareholder to take compensation in excess of going market rates that might be paid for the same services. Since the willing buyer of a control ownership interest could reduce compensation to market levels, often it is appropriate to add back excess compensation to cash flow to reflect the additional economic benefits that would be available to the willing buyer. Financial Valuation: Applications and Models, Second Edition, 2006, p 100 According to Shannon Pratt, Robert Reilly and Robert Schweihs: The general idea of the compensation adjustment is to substitute the cost of hiring and paying a non-owner employee for the compensation actually paid to the owner to perform the same functions. Valuing Small Business and Professional Practices, 2nd Edition, Year, p 92 3 What are we trying to accomplish by looking at physician compensation? Owners Compensation in Physician Practice Valuations October 14, 2010
  • 4. BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Lets consider some industry data but where to start? 4 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
  • 5. SOURCES OF BENCHMARK DATA Risk Management Associates (RMA) The RMA eStatement Studies database publishes private company financial data and ratios used to analyze company performance, risk and growth. RMA surveys have been recognized both within banking and non banking institutions as an authoritative resource for benchmarking small and medium sized businesses against industry data. The information provided in RMAs eStatement Studies is obtained directly from the financial statements submitted to RMA member financial institutions nationwide. 5 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
  • 6. SOURCES OF BENCHMARK DATA First Research First Research provides industry profiles covering over 700 Industry sectors. First Research industry profiles contain critical analysis, statistics and forecasts that allow the user to compare a given company to the overall industry. Industry data is obtained from primary and secondary sources such as trade publications, company annual reports, SEC filings such as 10Ks, and the US Bureau of Labor Statistics. 6 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
  • 7. SOURCES OF BENCHMARK DATA US Internal Revenue Service (IRS) ValuSources IRS Corporate Ratios provides industry standard financial statement benchmarking data for over 250 industries, organized by Standard Industrial Classification (SIC) code. This report allows the user to benchmark a given entity against its peers within a specific industry. These financial ratio benchmarks are calculated using data from corporate tax returns collected by the United States Internal Revenue Service. 7 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
  • 8. SOURCES OF BENCHMARK DATA Bureau of Labor Statistics The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. www.bls.gov/bls/infohome.htm 8 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
  • 9. SOURCES OF BENCHMARK DATA Salary.com Salary.com is a leading provider of on- demand human resources software that helps businesses and individuals manage pay and performance. www.salary.com/aboutus/Facts.asp 9 The usual suspects Owners Compensation in Physician Practice Valuations October 14, 2010
  • 10. SOURCES OF BENCHMARK DATA Medical Group Management Association (MGMA) MGMA surveys have been recognized both within the healthcare industry and by the federal government as one of the acceptable resources to be used in determining the fair market value of physician compensation and are frequently used to benchmark healthcare organizations operational performance. 10 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
  • 11. SOURCES OF BENCHMARK DATA Sullivan, Cotter and Associates (Sullivan) Sullivan also publishes survey data summarizing physician compensation and production information and is an additional authoritative source of healthcare industry benchmark data. 11 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
  • 12. SOURCES OF BENCHMARK DATA American Medical Group Association (AMGA) The American Medical Group Association (AMGA) represents medical groups and organized systems of care, providing research, benchmarking and other advocacy services. The AMGA publishes various reports and surveys that allow medical groups to benchmark their performance against other groups on both a national and regional level. 12 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
  • 13. SOURCES OF BENCHMARK DATA Hospital and Healthcare Compensation Service (HHCS) Hospital & Healthcare Compensation Service (HHCS) specializes in healthcare salary and benefits research. As a publisher of annual salary & benefits reports, HHCS conducts an extensive program of ongoing compensation research in areas of healthcare such as hospitals, physician practices, nursing homes, etc. 13 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
  • 14. SOURCES OF BENCHMARK DATA Other medical specialty groups American Academy of Family Practitioners American College of Cardiology American Academy of Orthopedic Surgeons Other industry associations American Medical Association MGMA state chapters Healthcare Finance Management Association (HFMA) 14 Healthcare industry benchmark data Owners Compensation in Physician Practice Valuations October 14, 2010
  • 15. BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Survey says 15 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
  • 16. BENCHMARKING PHYSICIAN COMPENSATION Physician qualifications Medical specialty Skill set Performance Years in practice Practice location Geographic location Metropolitan versus rural Market conditions Competitive environment Under served area Saturated Full Time Equivalent (FTE) Full time (0.8 FTE+) versus part time 16 Factors to consider Owners Compensation in Physician Practice Valuations October 14, 2010
  • 17. BENCHMARKING PHYSICIAN COMPENSATION Potential buyers* Hospitals Health networks Solo MD Group practice Other data points Patient visits Production/charges Collections for professional charges (net revenue) Work Relative Value Units (wRVUs)** * Well cover this shortly. ** IBID. 17 Factors to consider Owners Compensation in Physician Practice Valuations October 14, 2010
  • 18. BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Benchmark compensation data 18 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010 Initial conclusion Owners compensation set based upon the average of the median data, $180,000but we need to take a longer look at this.
  • 19. BENCHMARKING PHYSICIAN COMPENSATION Setting physician compensation is a benchmarking exercise Historical compensation Productivity Charges Collections for professional charges wRVUs Other forms of compensation Medical directorship On-call pay Ancillary income Ambulatory Surgery Center (ASC), imaging, etc. Federal regulations and guidelines may take precedence over valuation principles Stark laws Anti-kickback statute Potential employment arrangements must be considered in compensation projections Fair market value requirement Test for commercial reasonableness 19 Primary considerations Owners Compensation in Physician Practice Valuations October 14, 2010
  • 20. BENCHMARKING PHYSICIAN COMPENSATION Primary care, often the first point of contact for a patient in the continuum of care Family Practice Internal Medicine Pediatrics Specialty care, some examples from the National Institute of Health (NIH) http://www.nlm.nih.gov/medlineplus/ency/article/001933.htm 20 Physicians generally fall into two main types Owners Compensation in Physician Practice Valuations October 14, 2010
  • 21. BENCHMARKING PHYSICIAN COMPENSATION Types of physician services Evaluation and management (E/M) General office visit Consultation Counseling or coordination of care between physicians Procedures Surgery, treatments, therapy, etc. Collections for physician services Commercial payors Blue Cross/Blue Shield, Aetna, Cigna, etc. Government payors Medicare Medicaid Tricare (CHAMPUS) 21 Medical revenue Owners Compensation in Physician Practice Valuations October 14, 2010
  • 22. BENCHMARKING PHYSICIAN COMPENSATION Stark law Physician referrals under Medicare and Medicaid Anti-kickback statute Payment for referrals Anyone engaging in business with a federal healthcare program Valuation adjustments effected by Stark/Anti-kickback Cannot substitute more favorable reimbursement rates Using a potential buyers payor contracts may result in higher practice value Are the physicians going to be employed by the buyer? Projected compensation should match physician compensation under buyer employment Failure to do so may result in a higher practice value and be considered a device to pay for referrals Two standards of value Payments to physicians must meet traditional fair market value definitions Commercially reasonable Does the prospective transaction make sense? Is this a good business decision? Sanity check 22 Federal regulations and guidelines Owners Compensation in Physician Practice Valuations October 14, 2010
  • 23. BENCHMARKING PHYSICIAN COMPENSATION 1. Historical physician compensation Good starting point for what the market will support Must be adjusted to match compensation as defined by benchmark source Per instructions to the MGMA survey questionnaire: Total compensation State the amount reported as direct compensation on a W2, 1099, or K1 (for partnerships) plus all voluntary salary reductions such as 401(k), 403(b), Section 125 Tax Savings Plan, and Medical Savings Plan. The amount reported should include salary, bonus and/or incentive payments, research stipends, honoraria, and distribution of profits. Do not include The dollar value of expense reimbursements, fringe benefits paid by the medical practice such as retirement plan contributions, life and health insurance, automobile allowances, or any employer contributions to a 401(k), 403(b), or Keogh Plan. 23 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
  • 24. BENCHMARKING PHYSICIAN COMPENSATION 2. Gross charges Useful for comparing physicians within a practice or group Not typically relevant for comparison to industry or market data Removes effects of varying payor mix between physicians, accounts receivable management, bad debt, etc. 3. Collections for professional services Typically has a direct effect on physician compensation Can be effected by payor mix, accounts receivable management, bad debt, etc. Poor collections do not necessarily indicate a lack of productivity 24 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
  • 25. BENCHMARKING PHYSICIAN COMPENSATION 4. Volume and complexity of services provided Higher volumes = greater production Measured using the Centers for Medicare and Medicaid Services (CMS) Resource Based Relative Value Scale (RBRVS) Unit of measure = Relative Value Units (RVUs) Removes effects that payor contracts, payor mix, accounts receivable management, bad debt, etc. have on collections Allows apples-to-apples comparison of productivity Complex services receive a greater weight 25 Bases for comparison Owners Compensation in Physician Practice Valuations October 14, 2010
  • 26. BENCHMARKING PHYSICIAN COMPENSATION Current Procedural Terminology (CPT) codes Issued by the American Medical Association Subset of the Healthcare Common Procedural Coding System (HCPCS) Referred to as HCPCS Level I Five digit codes Two character modifiers 26 = professional component TC = technical component Others Grouped by type Medicine = 9xxxx Surgery = 1xxxx-6xxxx Radiology = 7xxxx Subject to change Updated annually Additions and deletions Some codes are temporary 26 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
  • 27. BENCHMARKING PHYSICIAN COMPENSATION CPT code reports Often generated by a medical billing system May be produced through a component of an Electronic Medical Records (EMR) system 27 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
  • 28. BENCHMARKING PHYSICIAN COMPENSATION Relative Value Units (RVUs) Primarily used as a component of the Medicare reimbursement formula Assigned by CMS Listed by CPT code (HCPCS code) Also used as a proxy for determining physician productivity Wide spread use and acceptance Often used to set productivity-based incentive payments 28 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
  • 29. BENCHMARKING PHYSICIAN COMPENSATION Three components Malpractice Relative Value Unit (mpRVU) Varies depending on the relative malpractice exposure of the CPT code Practice Expense Relative Value Unit (peRVU) Represents the expenses the practice incurs in providing the service (general overhead) Work Relative Value Unit (wRVU) Designed to reflect the work effort and intensity required of the physician in providing the service 29 Measuring productivity using RBRVS Owners Compensation in Physician Practice Valuations October 14, 2010
  • 30. BENCHMARKING PHYSICIAN COMPENSATION Physician Fee Schedule (PFS) Relative Value Files Download from www.cms.gov Issued on an annual basis Occasionally updated on an interim basis This year updated in July wRVU values will vary from year-to- year Generally issued before the upcoming calendar year Proposed rule Final rule 30 Calculating wRVUs Owners Compensation in Physician Practice Valuations October 14, 2010
  • 31. BENCHMARKING PHYSICIAN COMPENSATION Obtain CPT code reports on a per physician basis Annual summary Consider looking at multiple years Apply PFS data to CPT code summary Total results 31 Calculating wRVUs Owners Compensation in Physician Practice Valuations October 14, 2010
  • 32. BENCHMARKING PHYSICIAN COMPENSATION Cardiology (non-invasive) 6,000 9,000 Cardiology (invasive) 7,000 10,000 Family practice 4,000 5,000 Gastroenterology 6,000 9,000 General surgery 5,000 8,000 Internal medicine 4,000 5,000 Orthopedic surgery 7,000 10,000 32 Sample annual wRVU amounts by specialty Owners Compensation in Physician Practice Valuations October 14, 2010
  • 33. BENCHMARKING PHYSICIAN COMPENSATION Example physician data Solo family practitioner In practice for 35 years Consistent annual revenues of approximately $500,000 Historical owners compensation between $150,000 and $180,000 Annual Work Relative Units production of approximately 6,500 Valuation for potential purchase by another solo practitioner 33 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
  • 34. BENCHMARKING PHYSICIAN COMPENSATION Conclusion Production seems to have outpaced compensation Historical compensation sets a precedent for benchmarked compensation Owners compensation set at $200,000 34 Example: Benchmarking compensation for a family practitioner Owners Compensation in Physician Practice Valuations October 14, 2010
  • 35. CASE STUDY A 200+ bed hospital engaged Blue to provide valuation services in regard to negotiations with a local physician group. Practice valuation Fair market value physician compensation Potential employment of physicians Asset appraisal Market overview Small metropolitan area <20,000 people One local hospital Fairly isolated Nearest metropolitan area about 150 miles away The practice has initiated negotiations with the hospital The practices administrator wishes to retire Ownership is considering a sale of the practice to the local hospital The practices physicians are considering employment options with the local hospital 35 Background and engagement details Owners Compensation in Physician Practice Valuations October 14, 2010
  • 36. CASE STUDY Multi-specialty practice located near the hospital 14 physician owners 6 family practice doctors 5 internal medicine doctors 3 pediatric doctors No employed doctors No mid-level providers Little ancillary income Cosmetic Skin Spa offering elective services Sold oncology infusion service line in 2008 due to the increasing cost of drugs combined with a reduction in reimbursement 36 Practice overview Owners Compensation in Physician Practice Valuations October 14, 2010
  • 37. CASE STUDY 37 Historical financial statements Owners Compensation in Physician Practice Valuations October 14, 2010
  • 38. CASE STUDY 38 Historical financial statements Owners Compensation in Physician Practice Valuations October 14, 2010
  • 39. CASE STUDY 39 Historical compensation all sources Owners Compensation in Physician Practice Valuations October 14, 2010
  • 40. CASE STUDY 40 Historical compensation professional medical services Owners Compensation in Physician Practice Valuations October 14, 2010
  • 41. CASE STUDY 41 Benchmarking historical compensation family practice Owners Compensation in Physician Practice Valuations October 14, 2010
  • 42. CASE STUDY 42 Benchmarking historical compensation internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
  • 43. CASE STUDY 43 Benchmarking historical compensation pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
  • 44. CASE STUDY 44 Benchmarking collections family practice Owners Compensation in Physician Practice Valuations October 14, 2010
  • 45. CASE STUDY 45 Benchmarking collections internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
  • 46. CASE STUDY 46 Benchmarking collections pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
  • 47. CASE STUDY 47 Benchmarking wRVUs family practice Owners Compensation in Physician Practice Valuations October 14, 2010
  • 48. CASE STUDY 48 Benchmarking wRVUs internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
  • 49. CASE STUDY 49 Benchmarking wRVUs pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
  • 50. CASE STUDY 50 Benchmarking summary Owners Compensation in Physician Practice Valuations October 14, 2010
  • 51. CASE STUDY 51 Benchmarking conclusion family practice Owners Compensation in Physician Practice Valuations October 14, 2010
  • 52. CASE STUDY 52 Benchmarking conclusion internal medicine Owners Compensation in Physician Practice Valuations October 14, 2010
  • 53. CASE STUDY 53 Benchmarking conclusion - pediatrics Owners Compensation in Physician Practice Valuations October 14, 2010
  • 54. CASE STUDY Is the data collected on a national or regional basis? National data was used in this example Does the data include owner/employees where the amount of compensation reported may also include business profit as compensation (i.e., partners in professions and businesses)? Pass through entity Concerning data from business and professional associations, what are the sampling sizes that relate to the subject valuation? National data was used to ensure an effective sample size When using SIC codes in identifying comparables, how do the particular characteristics of the subject company compare with the broader range of companies covered by the SIC code? Matched by physician specialty How does the data use/define the job titles, and are the actual duties comparable to the duties/hours of the subject owner/employee? We have excluded production and collections for non-medical services Does the data survey reflect averages? Medians? Quartiles? Percentile data 54 Business Valuations Resources (BVR) 12 point checklist Owners Compensation in Physician Practice Valuations October 14, 2010
  • 55. CASE STUDY Does the survey fairly reflect compensation for people with particular niches and sub- specialties; i.e., matrimonial attorneys, forensic accountants, lobbyists, etc.? Usually covered by addressing medical specialty, but exceptions always exist Does the valuator need to include multiple job titles from the survey data to cover the owner/employees duties? Additional survey data Medical directorships On-call pay Academic faculty What is the reliability of the statistics and sources that the survey uses? Known and widely-used Where applicable, are stock options, restricted stock, shadow stock compensation as well as other perks reflected in the data survey and comparable to the owner/employee in question? Excluded Were all companies in the database consistent in having/not having retirement plans separate from salary? Yes Is the owner a key person in the business or a top performer/sales generator? Certain physicians are more productive than others 55 Business Valuations Resources (BVR) 12 point checklist Owners Compensation in Physician Practice Valuations October 14, 2010
  • 56. CASE STUDY Fair market value? Where does the market data point us? Consistent with conclusion of value? Commercially reasonable? Consider the proposed employment arrangement Fixed salary Places bulk of risk with employer Production-based salary Less risk for employer Base salary + incentives Balances risk between employer and physician Market factors Are there alternative employers? Is this an underserved area? Medical need 56 Other closing considerations Owners Compensation in Physician Practice Valuations October 14, 2010
  • 57. PENDING CHANGES IN PHYSICIAN COMPENSATION Medicare will discontinue use of consultation codes CPT codes 99241-99245 (office consultation) CPT codes 99251-99255 (inpatient consultation) Effective January 1, 2010 Not reflected in 2009 results E/M codes must be used instead CPT codes 99211-99215 (office/outpatient visit, established) As much as a 30% decrease in reimbursement Specialist report a measurable decrease in revenue Medicare budget cuts Originally scheduled for January 1, 2010 21.3% reduction in Medicare payments Cut based upon Sustainable Growth Rate (SGR) formula Replaced by a 1.3% increase for 2010 Pending cuts December 2010 23% January 2011 30% 57 Changes in Medicare Owners Compensation in Physician Practice Valuations October 14, 2010
  • 58. PENDING CHANGES IN PHYSICIAN COMPENSATION Expanded coverage Estimated 32 million new Medicare beneficiaries Primary care physician shortage Increased demand for Nurse Practitioners Healthcare in Massachusetts may give some indication of what will happen nationwide Payment reform Measures intended to reduce healthcare spending Bundled payments Episodes of care Disincentives for providing unnecessary procedures or treatments Focus on prevention Payment for outcomes versus procedures Preempt the need for procedures or treatments 58 Healthcare reform Owners Compensation in Physician Practice Valuations October 14, 2010
  • 59. PENDING CHANGES IN PHYSICIAN COMPENSATION Revised healthcare delivery models Accountable Care Organizations (ACO) A new version of PPOs? Vertical integration of the healthcare delivery system Patient-Centered Medical Homes (PCMH) Physician groups mainly consisting of primary care Long-term care Preventative medicine Hands on patient management Independent Practice Associations (IPA) Healthcare equivalent of a cooperative corporation Shares resources Administrative staff Capital equipment Increased bargaining power Payor contracts Supplies 59 Healthcare reform Owners Compensation in Physician Practice Valuations October 14, 2010
  • 60. CONCLUSION Kam McQuay, CPA/ABV, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 317.633.4705 kmcquay@blueandco.com Jeff Moffatt, CPA/ABV/CITP, CVA One American Square, Ste. 2200 Indianapolis, IN 46282 317.633.4705 jmoffatt@blueandco.com 60 Questions? Owners Compensation in Physician Practice Valuations October 14, 2010